Fed’s Proposed Tip Sharing Changes Spark Concerns

OCEAN CITY — Under a federal rule change proposed this week by the Department of Labor (DOL), tipped employees could be required to pool their tips with their back-of-the-house co-workers or even their employers, a proposal that could have long-reaching repercussions in the resort area.

The Trump Administration’s DOL on Tuesday announced a Notice of Proposed Rulemaking (NPRM) regarding the tip regulations under the Fair Labor Standards Act. Under the proposed rule change, employers would essentially have the freedom to collect tips earned by front-line staff such as servers and bartenders and redistribute the tips to other workers such as cooks and dish washers, for example.

In simplest terms, an employer would be able to collect all of the tips earned by front-of-the-house staff and after ensuring the front-line servers are paid the federal minimum wage of $7.25, redistribute the rest of the tips to other workers. Essentially, the rule would allow employers to subsidize the pay of traditionally non-tipped employees on the backs of the tipped employees.

Proponents of the rule change applaud it as a means to reduce or eliminate disparity in wages that often exists between the tipped employees and non-tipped employees. Critics, however, call the proposed rule change a means for employers to pay non-tipped workers more and tipped workers less. Perhaps even more sinister, the rule change could allow employers to collect the tips and not appropriately distribute them to all employees but rather keep the earnings above minimum wage for themselves, some critics claim.

In either case, the proposed rule change could have long-ranging effects in resort communities such as Ocean City and its hospitality-based economy. With hundreds of restaurants, bars, hotels and other hospitality-based businesses, tips are flowing throughout the summer in Ocean City and the DOL’s proposed rule change announced this week could dramatically change how the earnings are redistributed.

Under the current rule, employers can claim a tip credit that allows them to pay tipped employees considerably lower than the federal minimum wage, in many cases as low as $2 to $3 an hour. The assumption is the tips those workers earn more than compensate them above and beyond the federally-mandated $7.25 minimum wage. To be sure, most servers and bartenders working in a busy summer seasonal business often earn far more than the minimum wage and sometimes make as much as $20 to $30 an hour during a strong shift in the height of the season.

However, the rule change proposed this week by the DOL would allow employers to collect those wages and redistribute them to other workers as a means to reduce the disparity in earnings.

“The department’s proposal only applies where employers pay a full minimum wage and do not take a tip credit and allows sharing tips through a tip pool with employees who do not traditionally receive direct tips such as cooks and dish washers,” the DOL statement reads. “These ‘back of the house’ employees contribute to the overall customer experience, but may receive less compensation than their traditionally tipped co-workers.”

As stated, the proposed rule would allow employers to distribute customer tips to large tip pools that include non-tipped workers, such as back-of-the-house staff. If approved, it could dramatically change the traditional pay structure in restaurants and other hospitality-based businesses.

“This would likely increase the earnings of those employees who are newly added to the tip pool and further incentivize them to provide good customer service,” the DOL statement reads. “The proposed rule would additionally provide employers greater flexibility in determining pay practices for tipped and non-tipped workers. It also may allow for a reduction in the wage disparities among employees who all contribute to the customer experience.”

In 2011, the DOL under the Obama Administration barred the practice of pooling tips and taking earnings away from front-of-the-house workers and redistributing them to other workers. The DOL’s proposed rule change announced this week would reverse that 2011 decision, a point not lost on worker advocacy groups. “Tips belong to the workers who have earned them, period,” National Employment Law Project (NELP) Director Christine Owens said. “But today, the Labor Department has proposed a pathway for employers to keep the tips for themselves. The department rationalizes that the proposed rule is a way to let some employers redistribute tips to workers who don’t traditionally get tips, but the effect of the proposal would be let those employers pocket a portion of the tips.”

Owens essentially called the proposal an attack on front-of-the-house workers and claimed it represents the Trump Administration’s penchant for coming down on the side of corporations and not labor.

“Today, the Trump Administration once again sided with businesses and corporations over workers, proposing a rule that constitutes a wholesale attack on restaurant workers and the meager federal protections they have for their pay,” she said. “Worse, the DOL is trying to hid how much this change in existing protections will cost workers as it tries to sneak this rule through an extraordinarily short public comment period over the holidays.”

The NELP statement claims restaurants, for example, should not subsidize the wages of some workers on the backs of others.

“If companies have trouble retaining non-tipped workers because their pay is so low, the solution is for the companies to raise the wages of those workers, not for the Labor Department to rig the rules so employers can essentially steal earnings from tipped workers to subsidize the businesses’ low wage model.”

Economic Policy Institute (EPI) Senior Economist Heidi Shierholz claimed the proposed rule change as written doesn’t even guarantee the pooled tips will find their way into the pockets of the other workers as intended.

“Crucially, the rule doesn’t actually require that employers distribute pooled tips to workers,” she said. “Under the administration’s proposed rule, as long as the tipped workers earn the minimum wage, the employer can legally pocket those tips.”

Shierholz said in the statement the bottom line would likely be less wages for restaurant workers and more earnings for the employers in many cases.

“Make no mistake,” she said. “As a result of this rule, workers will take home less and their loss will be employers’ gain.”

Ocean City Hotel-Motel-Restaurant Association Executive Director Susan Jones said the proposal had already been added to the organization’s meeting agenda for Thursday, the outcome of which is not known. While Jones said she needed to weigh all of the information, she had already formed a cursory opinion.

“In my opinion, pooled tips belong to those who provide the customers with the service,” she said. “After all, those are the people who make around $3.63 per hour, so they deserve to receive tips. I don’t necessarily agree with sharing tips with the back of the house. It is the front of the house that is judged on service.”

The proposed rule change was published in the Federal Register on Tuesday, setting in motion a rather short 30-day public comment period, especially coming in the midst of the holiday season. Interested parties can submit comments on the DOL’s Wage and Hour Division’s proposed rule website or by visiting www.regulations.gov.

About The Author: Shawn Soper

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Shawn Soper has been with The Dispatch since 2000. He began as a staff writer covering various local government beats and general stories. His current positions include managing editor and sports editor. Growing up in Baltimore before moving to Ocean City full time three decades ago, Soper graduated from Loch Raven High School in 1981 and from Towson University in 1985 with degrees in mass communications with a journalism concentration and history.